Chevron Corporation (NYSE:CVX)’s planned acquisition of PDC Energy Inc is another example of the company effectively using its premium multiple to acquire companies, analysts at RBC Capital Market said as they upgraded the stock to ‘Outperform’.
What’s more, it is purchasing a company trading at a materially higher free cash flow (FCF) multiple, driving accretion across key metrics, the analysts wrote in a client note.
The analysts noted that Chevron has typically been conservative when managing its balance sheet and shareholder returns, which has been seen as a negative at some points of the cycle but has allowed it to maintain its dividend during recent downturns, while also making it the only ‘Super-Major’ that has executed accretive mergers and acquisitions (M&A) in recent years.
“Looking forward, we believe the macro environment is likely to remain volatile, however weaker end product demand and OPEC+ managing the oil market leaves CVX’s upstream heavy weighting well-placed,” the analysts said.
“This combined with its fortress balance sheet and commitment to remaining disciplined through organic and inorganic activity should prove defensive over time.”
After incorporating the PDC Energy deal and adjusting for weaker downstream margins, the analysts raised their earnings per share estimates for their forecasted period by 4% to 10%. In the updated numbers they noted that Chevron trades on a slight discount to its closest peer, Exxon Mobil, on embedded value/debt-adjusted cash flow (EV/DACF) while generating a 130 basis points higher FCF yield on 2024 estimates and offering a higher dividend yield.
As such, they raised their price target on Chevron to $180 from $165.
Contact the author at stephen.gunnion@proactiveinvestors.com